Germany facing winter of stagflation as Covid-19, bottlenecks bite

Berlin

PERSISTENT supply bottlenecks and a fourth wave of coronavirus infections in Germany are further delaying the recovery of Europe's largest economy from the pandemic, the Ifo institute said on Tuesday (Dec 14) as it slashed its growth forecast for next year.

The Ifo institute expects the German economy to shrink by 0.5 per cent quarter-on-quarter in the final 3 months of this year and to stagnate in the first 3 months of next year.

Coupled with the current surge in overall prices, Germany is now facing several winter months of zero growth and unusually high inflation, a combination described by economists as stagflation.

For 2022 as a whole, Ifo slashed its economic growth forecast to 3.7 per cent from 5.1 per cent projected in September, and also confirmed its already reduced forecast of 2.5 per cent for this year. For 2023 it lifted its growth forecast to 2.9 per cent from 1.5 per cent.

"The strong recovery initially expected for 2022 will be further pushed back," Ifo chief economist Timo Wollmershaeuser said.

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The bleak outlook was shared by the economy ministry, which on Tuesday said in its monthly report that the government expected to see "rather weak" economic output in the final quarter of the year.

Activity in the services sector will likely slow as Germany faces renewed curbs aimed at breaking its fourth wave of Covid infections, while supply bottlenecks for microchips especially in the car industry hamstrung manufacturing, the ministry said.

However, in view of the high order backlog, the ministry had a positive outlook for German exports.

The inflation rate is seen rising further in the short term, reducing the purchasing power of German consumers in light of meagre wage growth so far.

Ifo expects the national consumer price index (CPI) to rise by 3.1 per cent this year and by 3.3 per cent next year - both rates clearly above the European Central Bank's price stability target of 2 per cent for the eurozone as a whole.

"Rising costs associated with delivery bottlenecks play a driving role, as does the delayed adjustment to the increased energy and raw material prices," Wollmershaeuser said.

In 2023, Ifo expects inflation rate to slow to 1.8 per cent. REUTERS